BofA’s Moynihan on Raising Capital, Restoring Credibility and the Future on Merrill

It's a big day for Bank of America on Wednesday as the firm’s top executive Brian Moynihan holds an investor call with Bruce Berkowitz, one of the company's largest shareholders. Questions of raising more capital, upping the stock price and the future of Merrill Lynch are all likely to come up on the call.

AP

Brian T. Moynihan

Brian Moynihan, CEO of Bank America spoke exclusively to CNBC’s Maria Bartiromo about these issues on Tuesday. Moynihan told Bartiromo he intends to gain back credibility with investors and to “continue to do what we were doing, which is drive our customer-driven business, continue to perform in the market.”

When asked if he would consider stepping down, Moynihan answered “No.” The question of selling Merrill Lynch also came up. All signs indicated that BofA will keep Merrill. Moynihan said, “it's core to our customers to have those activities.”

BofA shares have certainly been under a lot of pressure. Year to date, the stock is down 43 percent, and it has fallen 20 percent in the past week alone. A major reason, of course, fear of dilution.

MARIA BARTIROMO: If you come to the market to raise more capital, how are you going to turn this around?

BRIAN MOYNIHAN: We're going to keep doing what we've been doing for the last 18 months. So if you look at where we started in January, 2010, we've raised our capital level significantly from then and also built reserves. So we have $128 billion of tangible common equity. We have tremendous ability to continue to retain earnings, manage our balance sheet, and continue to drive the company forward like we've done for the last six quarters. In the last quarter alone, we took a $20 billion charge to put more of the mortgage stuff behind us, and we still have more capital than we had in the third quarter of 2010.

MARIA BARTIROMO: Can you really go forward and say, "We're going do the same thing that we've been doing?" Because what you've been doing is obviously not working. The market is not believing you. Let’s go back and go through some of these promises that you've made. You said, for example, you were very clear on your investor day, you said you were going raise the dividend, just a few days later the Feds said, "You can't pay a dividend." Then you grossly underestimated the cost of mortgage put backs and foreclosure — foreclosure costs repeatedly. Even in settlements with the private label investors, that $8.5 billion settlement is now being questioned. Was that a mistake?

BRIAN MOYNIHAN: No, it was to settle that lawsuit was critically important for us. It took risks that was unknown and brought it to the table, and we found a way that we could actually get something done and put it behind us. I think it's fair to both parties, and we'll let it go through the court system. We expected the interveners to come in, they have till the end of August to file their intervention and protests. Then we'll let the court decide.

MARIA BARTIROMO: Your credibility is obviously on the line right now. How are you going to get it back? What is your plan?

BRIAN MOYNIHAN: It's the same. We're going get it back by continue to do what we were doing, which is drive our customer-driven business, continue to perform in the market. So if you take in the second quarter, we grew our checking account, we grew our deposits, we grew our investment banking fees, second in the world in that, had good trading results on a relative basis, wealth management basis continues to make money. Five of our six businesses were profit. We got to keep driving those businesses, and then we got to keep moving the mortgage mess behind us, both from getting through the pile of mortgages that have to be dealt with in terms of defaulted customers and modifying everybody we can. The second thing is continue to build the balance sheet that we've been building for the last 18 months to provide the capital and liquidity and care that we had when we thought we might face another downturn. We had a choppy market the last few weeks, and we've gone through it fine.

MARIA BARTIROMO: Let me get back to some of these mortgage-related lawsuits. When will they end? You have an expectation in terms of liabilities to come. What is it?

BRIAN MOYNIHAN: We've just filed in our public filings so we’re basically on a rep and warrantee have each quarter, have put away major pieces of liability. And we accrued for other liabilities. And that's all in our disclosure, so we put that behind us. The court proceeding will take about a year, year and a half to get through. That's the normal case, of course. On these other security suits, we've had the suit like AIG filed yesterday, for three years now. But there's been other people filed the same suit, class action security claims. We'll let the court system work on that through the next several weeks, months, and years, frankly, because it's a very slow process in the court.

MARIA BARTIROMO: Did you make a mistake by settling the state attorneys… in a sense seeing the doors, the floodgates open with others? Or, you're saying this was in the works for three years, and then they just filed yesterday on AIG?

BRIAN MOYNIHAN: No, the class action security suits, we've had other people file the same claims other than AIG. That's been going on for a couple years, two or three years. Other people have filed similar claims, because all the investors want represent themselves.

MARIA BARTIROMO: What can you do to raise capital? We know what BASEL III is requiring… they're saying it's many years out, but ten percent to your capital. Would you consider selling the stake in the Chinese bank?

BRIAN MOYNIHAN: We won't talk about individual positions. But what we've been doing is the same is generating earnings, continuing to reposition the balance sheet through selling off non-core businesses. We've sold 23 businesses in the last six quarters. That's helped us raise our capital levels and our reserves at the same time for all the issues you just talked about. We're going continue on a course. You'll find us continuing to dispose of businesses. We'll keep working on that and through the retention earnings and through optimization of our balance sheet, we have as much tangible common equity as our other competitors.

MARIA BARTIROMO: Has the stake in Chinese Construction really done anything for you? What would that stake be valued as?

BRIAN MOYNIHAN: It's valued in our capital today, it's been a very strategic relationship with us, and it's provided a great value to us in terms of exchanging businesses and we'll continue to be a strategy partner with them.

MARIA BARTIROMO: Are you exploring getting out of that stake?

BRIAN MOYNIHAN: We're not, we don't comment on those things.

MARIA BARTIROMO: Merrill Lynch. This is another area where people are wondering if, in fact, it makes sense to break up Bank of America, given what's going on. Would you consider selling Merrill?

BRIAN MOYNIHAN: I think, what people think as Merrill Lynch is actually an integrated Bank of America Merrill Lynch combination has occurred both on the wealth management side and also on the capital market, sales and trading, investment banking side. So, it's core to our customers to have those activities. There are plenty of other things like we've been demonstrating in the last six quarters that we can sell and create capital that are much less important to our customers than what Merrill Lynch does for our customers every day.

MARIA BARTIROMO: Like what?

BRIAN MOYNIHAN: Well, we sold our interest in Italian Balboa Life Insurance Co., we sold just last quarter we sold — a credit card books — business — reason is credit card book and other things — Sovereign's credit card book — book that we had for other banks. So we continue to pare away. These are not — all these add up to a lot of improvement in the balance sheet, and they also — all our private equity business we've been selling this last week, we had intent to sell another chunk of that, selling mortgage servicing rights, we've been selling that. All these things add up to a lot of capital.

MARIA BARTIROMO: Has the board — said to you that they would like you to stay? Brian, something's got to give, right? Talking about a more than 40 percent sell-off in the stock, year to date. Would you be prepared to step aside if in fact this continues?

BRIAN MOYNIHAN: I think that we're doing the right thing. I think the management team's doing the right thing, I think we continue to drive the business, our franchise continues to perform. I think we've built the capital base, and we'll continue to do that.

MARIA BARTIROMO: So you have no plans to step aside then?

BRIAN MOYNIHAN: No.

MARIA BARTIROMO: Let me ask you about tomorrow's conference call. Of course, you're doing the conference call with Fairholme Capital. This is a big risk that you're taking, right...

BRIAN MOYNIHAN: Yeah.

MARIA BARTIROMO: I remember a couple years ago what happened when the CFO of Lehman Brothers, Erin Callan did this with investor David Einhorn, she lost her job. Given the track record that we're talking about, and the upset in the stock price do you think this is a good idea tomorrow?

BRIAN MOYNIHAN: We’ve set this call up four or five weeks ago around our earnings. Because Fairholme's a major shareholder, they asked us to come, they've asked other CEOs to come from time to time. So it's become something different because the market and everything that's gone on. We talk to investors all the time. I've talked to investors this week and many have called. I've talked face to face with investors. They are a major investor in our company, with the amount of stock they own… to have a chance to talk to us about what's going on. Bruce Thompson and I will be there, and we'll talk to them, just like we talk to investors all the time.

MARIA BARTIROMO: This, they're inviting media, they're inviting negative questions… this is a little different than just speaking to your investors.

BRIAN MOYNIHAN: I am confident that the questions we'll get tomorrow are no different than questions we get from investors every day.

BRIAN MOYNIHAN: No, I don't. I think the market's reacted in the last few weeks, the last few days and spreads gone out. They came back in a little bit today. They'll settle back in. We have been wider than our peers for a long while our trading partners continue to trade with us. I think the market reflected, everybody moved out. You know, we continue to operate the company, have the capital, have the capabilities and liquidity to run the business, and I think it'll all settle in after we get a little more normalized times.

MARIA BARTIROMO: Can you say that the bank has adequate capital to meet the requirements of BASEL III?

BRIAN MOYNIHAN: Yes, we will have. We have said that we have a goal in the end of '12 to be at 6.75 percent to seven percent. The minimum requirement is 3.5 percent at the time. That's if you add all the rules that come in for the next six years over that, we'll be 100 basis points plus better that, based on the current rules. So we have lots of capital. That's one of the questions we have is, we have this franchise and we have the capital. We got to continue to optimize that to produce the kind of capital numbers that will match our peers. That's what we've been working on, and we've been catching up to them and we'll continue to do that.

MARIA BARTIROMO: Why do you think the market is reacting the way it is?

BRIAN MOYNIHAN: There's three issues, two or three issues around our company that are holding us back. One is the mortgage issues we talked about before, the second is, will those resolve in us needing to raise capital, and we've shown that we've been able to put aside the mortgage without raising capital. Third is, the general economy. At the end of the day, if you believe the American economy's going slower, most people would say Bank of America will suffer. But what we've actually seen is as the economy has slowed down, as unemployment has not gotten any better in the last four or five months, our credit continues to get better. Even in the month of July the delinquencies are down. All that seems to show that because of changes we’ve made two or three years ago, the portfolios are in much better shape going into this, sort of, no-growth environment, or low-growth environment than it was last time. So the trading assets are down, the bar is down, and you can see we make a lot more money per dollar bar than any of our competitors do. So we've managed to take risk out this balance sheet, which serves us well in difficult times.

MARIA BARTIROMO: Earnings tower of Bank of America is obviously very strong. You look just at the earnings for the second quarter. But the worry now is we're entering a double-dip recession. Are we?

BRIAN MOYNIHAN: We don't see that in our customer data, interestingly enough. So for our July data, our July 2011 spending versus July 2010 was up five percent in terms of people spending on their Bank of America plastic, whether it was debit cards or credit cards. That is about the 15th or 18th month of continuous year over year growth. It was actually up June to July a little bit. We don't quite see the consumers slowing down. Now a little bit of that is up five percent, two percent of that's driven by gas prices, the rest of it's driven by just core consumer spending. That is not as robust as we'd all like it, but they keep moving forward. So you look at that, you look at our delinquencies and portfolios, you look at middle market companies, they're very strong and very capable. You look at them having great capital, great cash, the cash in the system is just huge now. And we keep growing deposits. And in the month of July, $25 billion more deposits came in from our core commercial customers. So you look at all that, and you say, "The— the world's in a better shape to handle a flattening or a no-growth environment." That doesn't mean it's going be easy. That means we have to grind out earnings. How do we do that? By controlling costs and that's what we've been, driving the head count down, trying to control the costs in the company. We have a program to do that, which will take effect beginning this fall. The reality is, is all of us have been preparing, especially us, for this circumstance. Because it was not so robust growth that it wouldn't be unexpected, we might fly back, and that's what we've been doing.

MARIA BARTIROMO: You look at what the fed said today. The Fed is going to keep rates exceptionally low until 2013. Doesn’t that mean lower earnings going forward for Bank of America?

BRIAN MOYNIHAN: The issue with low rates is that the reality is, is that our deposit customers are free deposits, which, we pay no interest on… if the rate environment's lower. That being said, we've been in this environment now for several months, and we've adjusted down to that. So the margin of banks that have been under pressure is coming down. At this point, we believe we're seeing, sort of, the bottom. Now with the market already predicted this rate environment was going to prevail until the first quarter of '13. So what are we going about this management? We're taking out costs. So if you look at our retail system, we took out 63 branches in the second quarter we continue to take out branches. We said last spring, that we'd take out 750 or so, overall. We'll continue to do that. We continue to drive down our costs per deposit to a much lower rate, which is sort of your marker of already making progress throughout the franchise. So we have more deposits, less costs, more customers through checking accounts, and we're paying less for the deposits, and we just have to keep grinding that out. It's not fun, but that's how you got to operate the banking environment in this— in this kind of interest rate environment.

MARIA BARTIROMO: I know Bank of America does not have much exposure overseas, but through Merrill Lynch, you've got real exposure— in terms of counter party agreements with countries and companies around the world. How much really is the European problem affecting you?

BRIAN MOYNIHAN: We keep monitoring it. We have a really modest risk and especially in the country that's concerned. But what it does is continue to slow down. You know the economies of those big— you know, it's a big economy. You put it all together, and it keeps that under wraps. So, you've got the U.S. economy trying to grind out some growth, you've got Europe trying to grind out some growth, you put that together, that's a lot of the world's economy that is— is still trying to grind out a little bit of growth. And I think it's more the impact that it has, and the uncertainty that it's causing the damage in the market.

MARIA BARTIROMO: Back to dividends, and you promised the dividend on investor day. The fed said "You can't pay dividends right now." Are you even going ask to pay another dividend in the next quarter?

BRIAN MOYNIHAN: It's — it would be — we're not gonna ask until we're sure we can get it approved. And I think even since that time frame to now, the view of the economy and stuff is different. So we'll— when we have all the work done, which we needed to get done, and systems consolidation and Merrill fully integrated, when we can see— we'll go back and ask 'em, but at the time when we know we'll get approve. We're not goin' through that again.

MARIA BARTIROMO: So no dividend until, is it a 2012 affair, 2013 affair?

BRIAN MOYNIHAN: When we're comfortable we'll get it approved, we'll go and ask and we'll let people know when we get it approved.

MARIA BARTIROMO: So next year, at the earliest?

BRIAN MOYNIHAN: It's August, so we'll see that…

MARIA BARTIROMO: What about buying back stock?

BRIAN MOYNIHAN: That goes hand in hand with that (dividend), yes.

MARIA BARTIROMO: How would you characterize the environment right now in terms of the of lending?

BRIAN MOYNIHAN: I think there's plenty of credit availability for good clients. The loans we're putting on are very high credit quality, higher than we've seen in a long time, whether it's consumer loans or commercial loans. The issue, though, is that the underwriting standards are, because we're still working through the excesses as an industry, the underwriting standards are pretty tight. But in the last quarter, made $100 and some billion of credit available. We continue to do that. Mortgage availability is high. I think credit's there, it's just that typically when a person can't get credit as a business, it's the business plan that's struggling from a revenue and growth. What we need to do is create more revenue for our businesses in any way we can, and that will then drive. By giving credit out, we can't drive the economy. We give credit out as the economy grows to help support growth. We can't just give credit to people who don't have sort of solid businesses. The good news is that the companies are solid, that are participating in the national economies, are growing very strongly and they're using credit. For example, our international expansion, which we started on last year, 18 months ago or so our loans internationally are for large corporations, are loans in the U.S. And grew— grew 25 percent in the last year. So there's demand for loans for places where growth is, there's just not a lot of demands for loans in the United States. I think hopefully the fiscal policies and stuff will ultimately generate some growth, and then it'll be a better lending environment from a growth and loan balance.

MARIA BARTIROMO: What's plan B? What if you can't get out of this through growth? What if we continue to see investors nervous, they want to know that you've got adequate capital?

BRIAN MOYNIHAN: We continue to look, we have three things or four things we're doing. We have to continue to drive the franchise and win market share every day, which we do in the core retail businesses and our wealth management businesses and our commercial businesses and our trading businesses. That's one. The second thing is we're repositioning the franchise fairly dramatically to take away some of the things that our cap— what we call capital hall. So we have plan B, selling the businesses like we've done last six quarters, continuing to pay the balance sheet back, and optimize on our balance sheet. Our risk-weighted assets, just our regulatory assets versus our regular assets is about ten percentage points higher than our peers, largely 'cause we're still optimizing the franchise after we bought Merrill Lynch and getting the systems. That provides a lot of capital, especially when you're as big as we are.

BRIAN MOYNIHAN: The franchise continues to win, it's the best franchise in the business. We continue to reposition the balance sheet and we'll continue to do that. We have more capital, more reserves, and more capabilities to withstand, that market downturn— or slow economy than we've had at any time in our history.